Rental Properties, Bright-line Tests & Interest Deductions

For decades, owning a rental property has been the backbone of many a kiwi family’s retirement plan. In some cases, leveraging the equity in their own homes, landlords have bought properties with no money down. In the last ten to fifteen years, strong growth in house prices has put political pressure on successive Governments to make housing more affordable. The primary tool used by all of the main political parties has been to make rental property investment less attractive, thereby encouraging investments in other areas.

On 23 March 2021, the Government announced the most recent changes to the rules for landlords. The two main changes are the extension of the bright-line test from five years to ten years and the removal of the tax deductibility of interest for rental properties.

Brightline Test

On 1 October 2015, the “Bright-line test” was introduced for property owners. At the time this meant that if you sold land less than two years after you bought it you had to pay tax on any equity gains you made in the property; the family home being exempt from this rule.

From 29 March 2018 this was changed to five years, and now, from 27 March 2021 onwards, this has been extended to ten years.

Apart from your family home, if you now buy residential land and sell it less than ten years later, you will pay tax on the equity gains from the property. Currently, the proposed change will let newly built houses have a five year “Bright-line test” though the details for how this would work in practice have not yet been finalized.

It is important to note that the family home may not always be exempt.

If the family home is owned by a trust where the people living in the house are not the settlors of the trust, it probably won’t be exempt.

If the family home is rented out for a year or two while the owners are overseas and then sold less than ten years after it was bought, it would only be partially exempt from the “Bright-line test”.

More information about the proposed changes is available from the IRD website.

https://taxpolicy.ird.govt.nz/publications/2021/2021-other-fact-sheet-bright-line-test

Key Take Away Message

If you buy a property after 26 March 2021 you may have to pay tax on the equity gains if you sell it less than ten years later.

If you bought a property after 28 March 2018 you may have to pay tax on the equity gains if you sell it before the five years is up.

If you are thinking about selling a property and are unsure whether you will be subject to the “Bright-line test” or not, please contact us before you commit to selling it. These rules apply to everyone, not just landlords.

Interest Deductibility

From 1 October 2021 interest will no longer be tax deductible for money borrowed after 27 March 2021 for rental properties. This includes new loans for renovations and repairs to existing rental properties. The tax deductibility for existing loans on rental properties bought before 27 March 2021 will be reduced to 75% on 1 October 2021, then to 50% on 1 April 2023, then to 25% on 1 April 2024 and finally from 1 April 2025 no tax deduction will be allowed for the interest expense on rental properties.

An exemption to this rule was announced for new builds however the details about what constitutes a new build has not yet been finalized.

More information about the proposed changes to interest deductibility is available from the IRD website.

https://taxpolicy.ird.govt.nz/publications/2021/2021-other-fact-sheet-interest-deductions

Key Take Away Message

From 1 April 2025 the interest expense for rental properties will no longer be tax deductible, except for new builds. If you bought an existing property after 27 March 2021 or took out a new loan for repairs and maintenance, then interest will no longer be deductible from 1 October 2021 onwards.

If you are a New Zealand business seeking overseas investment, there are new requirements you’ll need to follow. Find out about the changes and what you need to do.

When: From16 June 2020

What: Changes have been made to rules that impact New Zealand businesses looking for overseas investment. The changes include:

• a new requirement to notify the Overseas Investment Office (OIO) about overseas investments, and
• a new national interest test that will apply to some investment transactions.

OIO will need to be notified about all overseas investments that will result in:

• more than 25% of a New Zealand business or its assets being owned by investors outside of New Zealand, or
• an increase to an existing holding beyond 50, 70 or to 100%.

A new national interest assessment will apply in rare circumstances to evaluate whether an overseas investment in sensitive and high-risk assets are in New Zealand’s national interests.  

Changes also mean the application process for lower-risk investment transactions is simplified, and some transactions will no longer need consent.

Changes to the Overseas Investment Act (external link) — Overseas Investment Office

Who: New Zealand businesses seeking overseas investment.

Why: Overseas investment can support New Zealand’s COVID-19 economic recovery, so that businesses can continue to grow and evolve, and keep more New Zealanders in jobs. The right checks and balances are needed to protect businesses that are important to New Zealand’s national security, economy, and communities.

What you need to do: If you are seeking overseas investment, be aware of the changes to when the OIO needs to be notified, and that a new national interest assessment might apply to overseas investors wanting to invest in your business.

Businesses seeking investment should get advice from their advisors, for example a lawyer or accountant.

Paid parental leave is extending from 22 to 26 weeks from 1 July 2020. Here’s what you need to know.

When: 1 July 2020

What: Paid parental leave will increase from 22 to 26 weeks. You are already required to provide job-protected parental leave to eligible employees for a minimum of 26 weeks if the employee meets the 6-month employment test (who’ve worked for you for at least an average of 10 hours a week for six months or more). For employees who meet the 12-month employment test (who’ve worked for you for at least an average of 10 hours a week for 12 months or more), the period of parental leave you are required to provide is 52 weeks.

Parental leave

The ‘keeping in touch’ allowance is increasing to 64 hours. These hours allow an employee to work a limited amount of time during the paid parental leave period, without losing their entitlement for payments. This arrangement needs to be agreed to by you and your employee.

Why: To provide increased support for primary carers including working parents with newborns and families taking on the permanent care of children under the age of six.

What you’ll need to do: This change doesn’t require you to provide additional leave. Just be aware that eligible employees who take parental leave will be paid for 26 weeks and can arrange to work up to 64 hours of ‘keeping in touch’ allowance.

The Government is moving to ease financial stress for around 149,000 taxpayers by changing the rules around write-offs for tax debt.

“Fewer people will have tax bills to pay this year,” said Revenue Minister Stuart Nash.

“Inland Revenue’s end of year automatic income tax calculation process for individuals is currently underway and is expected to run until early July. It is the annual wash up which results in people either having tax to pay or receiving a refund. 

“For the 2019-2020 income tax year, tax payable up to $200 will be written off. The usual threshold for writing off tax is $50.

“Increasing the write-off threshold will reduce tax bills for approximately 149,000 taxpayers. Writing off those amounts of tax may not seem huge to everyone, but it can be significant for someone experiencing financial stress.

“In the 2018/19 year for example, around half of those who had a tax bill up to $200 were earning less than $60,000 a year. We’re doing everything we can to help households as we move into the economic recovery phase.

“The auto-calc process has meant that people have already started receiving refunds. As at 10 June, there have been 2.3 million assessments carried out resulting in $586 million in tax refunds and $118 million in tax bills to pay.

“Once the process is complete, Inland Revenue expects to issue refunds in excess of $650 million as part of individual income tax assessment process.

“This change was agreed last week but legislation is still required to amend the returns for the 2019/20 tax year. For following tax years, the threshold will revert to the $50 limit,” Mr Nash said.

The auto-calc process applies to people whose income is only salary, wages, interest or dividends, not those who use the IR 3 tax return.

Inland Revenue is warning customers to be wary of scammers during the 2020 tax refund season.

Between Mid-May and July, IR automatically processes and pays out tax refunds. It is also when scammers may try to scam you.

This year IR will send around 2.5 million automatically assessed tax refund notices during that time, using both customer’s myIR accounts and through the post. These will be sent out in daily batches, Monday to Friday, between mid-May and the end of July.

Scammers know this as well and target this time of the tax year to try to rip people off and gain access to bank accounts and other personal information.

Here’s what IR will and won’t do when we send out the tax assessment notices.

Inland Revenue absolutely will let people know if they have a refund by sending an income tax assessment.

We will only pay funds directly in to the bank account we have on record and we will ask people to log in to their myIR account from www.ird.govt.nz 

We will ask for bank account details if we don’t have them but importantly, we will always ask people to provide these in a secure way – using their myIR account or through our call centre. 

We will also give people until February next year to pay any bill.  A bill won’t have to be paid immediately.

Inland Revenue will never put a dollar amount of a refund in an e-mail or txt message and will not ask for your credit or debit card details in order to  pay a refund.  We will also never ask you to reply to an e-mail or txt message to provide your bank account details.

IR will also never speak to customers threateningly.

New provisional tax option for small businesses

Small businesses that have turnover of less than $5 million a year can work out their provisional tax using the accounting income method (AIM).

AIM uses new functionality included in approved accounting software to work out payments. You can continue to use another provisional tax option if you think your business won’t suit AIM. It will suit your business if you have:

• irregular or seasonal income
• accounting software or want to start using accounting software.

Once you’ve opted in to AIM you’ll only pay provisional tax when your business makes a profit. This will help you to avoid cash flow problems.

As long as you make your payments in full and on time, there is no exposure to use-of-money interest. If your business makes a loss you can get your refund straightaway rather than waiting until the end of the year.

Changes coming to property market: Property Institute

Property Institute of New Zealand Chief Executive Ashley Church says the impact of the election on the New Zealand property market can already be largely predicted – even though the final make-up of the next Government could be weeks away.

Mr Church says that the role of NZ First as ‘King or Queen maker’ in coalition negotiations means that much of what is likely to happen is predictable because New Zealand First policy positions will feature whether National or Labour is ultimately chosen as a coalition partner.

“While the coalition talks are all about negotiating positions – Peters will have considerable leverage over both parties – so there are some bottom lines that we can reasonably expect to find their way into any final agreement”.